The new boss of the Serious Fraud Office has promised to consider dropping an investigation into Mayfair property tycoon Vincent Tchenguiz, who alongside his brother Robert is a suspect in a corruption and fraud investigation into the UK affairs of Icelandic bank Kaupthing before its failure three and a half years ago.

The unprecedented public pledge by SFO director David Green QC to conduct an “urgent review” was made in a letter sent on the eve of a judicial review brought by the brothers at the high court in London, which startedon Tuesday.Green only took charge of the embattled agency last month.

The Tchenguiz brothers and a handful of their advisers and former senior Kaupthing bankers deny any wrongdoing.

The 2008 collapse of Kaupthing and its subsidiaries – including British bank KSF, which had attracted billions of pounds in online deposits from British savers through its Kaupthing Edge account – – have led to a string of civil and criminal allegations of fraud around the world. No one has yet been prosecuted. The Tchenguiz brothers – both Conservative party donors – have themselves accused the bank of “fraudulent misrepresentation” in civil lawsuits, since dropped.

The Kaupthing investigation is the SFO’s biggest operation in a decade but has been rocked by revelations of basic errors in relation to the case being built against Vincent Tchenguiz. As a result the SFO has accepted it will have to pick up a bill for special damages, but Tchenguiz’s lawyers have indicated they will be seeking further aggravated and exemplary damages. Tchenguiz has intimated a damages claim of “significantly more than £100m” – more than three times the SFO’s annual budget.

The Financial Times claimed this week that the SFO investigation had been subject to “tensions” and “disagreements”, with a senior lawyer arguing the case should be dealt with by the Icelandic authorities while others were so enthusiastic they discussed sending an officer undercover to Annabel’s, a Mayfair nightclub and regular haunt of the Tchenguiz brothers. The SFO refused to comment on these reports.

Leading the courtroom fightback against the SFO on behalf of Tchenguiz is Lord Goldsmith, who in his former role as Labour’s attorney general famously clashed with the agency over its inquiry into BAE’s dealings in Saudi Arabia. He told the court: “The SFO has been lurching from one eleventh hour concession to another eleventh hour concession.”

At an earlier hearing, he suggested the SFO was clinging to its suspicions about Vincent Tchenguiz “like Mr Micawber, in the hope that something will turn up”.

The SFO’s investigation has been in crisis since an admission last December that search warrants for dawn raids on Vincent Tchenguiz’s home and Park Lane offices in March last year contained fatal flaws and should be quashed. Green said that subsequent moves to stall the return of seized documents had also been botched. A vanload of paperwork, held in quarantine for six months, would now be immediately returned to Vincent Tchenguiz.

Goldsmith urged Lord Justice Thomas, hearing the judicial review, to dismiss the latest promise from the SFO to review the case against Vincent Tchenguiz. He said the court should not delay in taking it upon itself to throw the case out.

Goldsmith accused the SFO of mainly building its case on information provided by Grant Thornton, despite what he claimed was the accountancy firm’s apparent partisan role. Grant Thornton acted as advisers to Kaupthing administration, including in relation to a legal claim from Vincent Tchenguiz’s business interests. Meanwhile, details of the SFO’s case against Robert Tchenguiz also emerged in court. Among the deals investigators are looking at are the alleged removal of some proceeds from the £1.56bn sale of supermarket chain Somerfield from a basket of collateral pledged by Robert Tchenguiz’s empire to Kaupthing shortly after the bank’s failure. In addition, the SFO is looking at allegations that bad debts were concealed by Robert Tchenguiz’s operations and that businesses he controlled borrowed hundreds of millions of pounds from Kaupthing when they were insolvent. All these allegations are denied and their grounds challenged by lawyers for Robert Tchenguiz.

His counsel, Lord Macdonald QC, argued that while there was no admission of wrongdoing by anybody connected to his client, the SFO had appeared to ignore the fact that legal accountability for decisions lay not with Robert Tchenguiz but with the trustees to the Tchenguiz Discretionary Trust (TDT), who took actions following extensive legal advice. Though his company R20 was an adviser to TDT, and he was a beneficiary, Robert Tchenguiz was not legally responsible, Macdonald contended. Robert was the largest borrower from Kaupthing, receiving about €2bn (£1.6bn) in loans from the bank – the equivalent of more than 40% of Kaupthing’s capital base, according to an Icelandic parliamentary report. Kaupthing was also a frequent co-investor on deals struck by Robert Tchenguiz.

The SFO is expected to set out its response to arguments put by lawyers for the Tchenguiz brothers when the hearing resumes on Wednesday.